Europe’s economy is becoming significantly stronger

The financial crisis in Europe seems to be a distant past: the EU Commission has once again raised its growth forecast for the euro zone and the EU as a whole. In 2017, 2018 and 2019 the economy is expected to grow faster than initially assumed. The open outcome of the brexite negotiations, the possible intensification of geopolitical conflicts – for example with North Korea – and US President Donald Trump, on the other hand, create uncertainty.

Europe as a whole, and the euro zone in particular, have had years of crisis with weak economic activity and even shrinking economies behind them. Now the situation looks better than it has been for 10 years. In 2007, growth in both the single currency area and the EU as a whole was 3.0 percent, and from 2008 onwards it was rapidly declining.

This year, the EU Commission expects gross domestic product (GDP) to increase by 2.3 percent in the 19 countries that have the euro as their currency. In the autumn, it had still assumed a figure of 2.1 percent. For 2017, the Commission is now even expecting GDP growth of 2.4 percent (autumn report: 2.2 percent). In the EU as a whole, the Brussels authorities are forecasting growth of 2.4 percent for 2017 and 2.3 percent in 2018 (autumn forecast: 2.3/2.1 percent).

The positive trend should largely continue in the coming year. In 2019, growth in the euro zone is expected to be 2.0 percent, and in the 27 EU states excluding Great Britain 2.1 percent. The United Kingdom is expected to leave the EU at the end of March 2019. The prospects for the UK itself look rather gloomy. For 2018, the EU Commission expects growth of 1.4 percent, and in 2019 it is expected to slow to 1.1 percent. However, these are estimates based on the assumption that trade relations between the remaining 27 countries and the island remained unchanged, it was said. The EU-27 and Britain are currently negotiating the modalities of EU exit and the period thereafter.

The EU Commission continues to expect robust growth rates for Germany. Strong private consumption and strong demand from abroad resulted in GDP growth of 2.2 percent in 2017. Brussels expects 2.3 percent in 2018 and 2.1 percent in 2019. This year, Romania, Ireland and Slovenia are likely to see above-average growth of more than 4 percent.

Satisfaction and warning in Brussels

EU Economic Affairs Commissioner Pierre Moscovici expressed his overall satisfaction: “The euro area can look forward to growth rates such as those seen recently before the financial crisis. Moreover, the growth rate across Europe is more balanced than it was ten years ago. However, EU Finance Commissioner Valdis Dombrovskis warned: “We must continue to ensure that this growth reaches all Europeans. We must use this window of opportunity to make our economies more crisis-proof and deepen economic and monetary union”.

The background to this development is, among other things, a better labour market situation as well as a strong global economy and booming world trade. In addition to brexite, there are geopolitical conflicts – for example on the Korean peninsula – and the establishment of global trade barriers such as Trump. This could still dampen the growth prospects. The EU Commission is therefore pressing for reforms of economic and monetary union in Europe, also against the background of persistently low inflation.

Inflation rates remain below ECB target

For 2017 and 2018, the agency expects inflation rates of 1.5 percent in the euro-zone. By 2019, it should be 1.6 percent. This would still fall short of the European Central Bank’s target of an inflation rate of just under two percent. This would not send a clear signal that monetary policy, which remains very loose, would be restricted.

Among other things, the EU member states are currently struggling to develop the European Stability Mechanism (ESM) into a European monetary fund, which could also act as a so-called “last resort” in the event of banking imbalances. In addition, there is also renewed discussion of a European system for securing savings. The Commission proposal has been on the table since 2015. Germany in particular has serious doubts about this. German Chancellor Angela Merkel had recently announced her intention to coordinate with France in spring.